The darkest week of encryption: a review of the tens of billions of dollars in Terra ecological collapse

After a week of “massacres”, the two major encrypted assets built on the Terra blockchain have plummeted to close to zero, with LUNA falling to as low as $0.000001 per piece, and the once “stable” algorithmic stablecoin TerraUSD (UST) was once It fell to a low of $0.044 per coin, and the Terra project, which was once sought after as a “stable leader”, fell to the “altar” within a few days. This event is also regarded by industry insiders as one of the biggest crashes in the history of encryption.

Do Kwon teases ‘funny mornings’ that broke anchor became ‘terrifying reality’

Over the weekend, some sharp-eyed traders began to take notice of the stablecoin UST, as it began to deviate from its $1 peg. At the time, rumors and speculation about the failure of the Terra stablecoin quickly spread on social media. However, Do Kwon — the 29-year-old co-founder of Terraform Labs — joked in a tweet that it was a “fun morning” and said Terraform Labs’ critics are “all poor” right now. Kwon claims that the temporary decoupling of the UST is no big deal, and the Terra community believes it.

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Then the decentralized exchange (DEX) Curve Finance noticed a large amount of UST selling on the trading platform, and the Curve official tweeted: “Yesterday, someone started selling UST in large quantities, so it started to de-anchor, however, this seems to have encountered A lot of resistance and the peg was quickly restored. Lots of ETH and stETH were also sold to get enough USD.” In response, Terra team Luna Foundation Guard (LFG) explained that it is providing $1.5 billion in Bitcoin and UST to professional market makers to maintain the peg.

What caused the crash?

Luna and UST plummeted at the same time, in what observers call a death spiral. In other words, investors rushed to sell their digital assets before the algorithmic stabilizers kicked in.

Luna’s market cap plummeted from $81 billion to around $240 million, triggering a sell-off and a crisis of confidence in the entire crypto industry, and the decoupling of UST is believed to be the main trigger for the entire crash.

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Historically, the UST has had decouplings, once in December 2020 and then in May 2021.

Terra has taken the following measures to prevent shedding:

  • Terra Protocol injected $70,000,000 of UST into Anchor in July 2021 as it was about to run out of liquidity. That’s a red flag for investors who think Anchor’s long-term rates are unsustainable, and many don’t know it.
  • Terra announced its acquisition of $10 billion worth of Bitcoin in March 2022. Bitcoin was supposed to be used as a reserve asset for UST. Terra had no choice but to sell their BTC to save the de-pegging. The Luna Foundation liquidated all 42,530 BTC in the first two days, and then the BTC price fell further, driving the entire cryptocurrency market down.
  • Terra announced 4pool on April 1, 2022, a new Curve pool consisting of UST, FRAX, USDC, and USDT. 3pool on Curve was dominant at the time of disclosure, and Terra is ready to migrate to 4pool. Terra has to withdraw funds from 3pool in order to transfer it to 4pool. Due to the lack of liquidity during the period, the UST anchor is vulnerable to attack.

The actual attack began on March 27, with anonymous transacting parties (rumored to be financial giants BlackRock and Citadel, but both denied) borrowing 100,000 BTC in exchange for UST, which began smashing UST into the Curve pool on May 7, resulting in two Token prices fell. The Terra Foundation was forced to start selling Bitcoin to keep the peg, the problem was that the BTC they bought had depreciated due to the crypto market sell-off.

And when it comes time to sell, Bitcoin has fallen from $42,000 at the time of the purchase to $34,000. While Terra was doing its best to maintain the anchor, the smasher went to Binance and started selling the remaining UST (about $600 million), UST began to fall below $0.98 and broke off the anchor, then as low as $0.05.

The sell-off created a negative feedback loop that caused everyone to panic sell.

Investors who wanted to reduce their exposure to LUNA started selling LUNA tokens on the market, and UST holders started exchanging their UST for LUNA, resulting in a massive increase in the LUNA supply.

De-anchoring turns into a nightmare for Terra, Luna and project investors

The community started to panic, and Anchor Protocol saw a large number of withdrawals. The Anchor protocol was once the third largest DeFi protocol, with a total value locked (TVL) of nearly $18 billion before the decoupling event fermented. From May 5 to today, Anchor’s TVL slipped from $18 billion to $410 million. Another DeFi protocol related to LUNA is the liquid staking app Lido. On May 6, Lido had over $18.6 billion in TVL, which has now shrunk to about $8.95 billion.

"The Dark Days of Cryptocurrency" - An Inside Look at the Vanished Terra Token Ecosystem and Broken Apps

After hitting a high of $0.84 the previous day, UST briefly fell to a low of $0.044 per coin. While many digital currency exchanges have shut down Terra-based wallets, some exchanges still allow UST deposits. Currently, FTX is the most active UST exchange on Friday, and the top trading pair with UST is Tether (USDT). Tether accounted for 37.78% of all UST transactions, followed by BUSD (31.59%), USD (29.83%), EUR (0.46%) and USDC (0.29%).

Terra’s native token, LUNA, has suffered more than UST, having fallen 99.9% from its all-time high, trading at $0.00004586 at the time of writing. On April 5, 2022, its all-time high price was $119.18. In just over a month, more than $41 billion in value has evaporated. Currently, it is not easy to sell LUNA as most exchanges do not accept deposits on the Terra chain.

Impact on other cryptocurrencies and retail investors

Those who own bitcoin and other cryptocurrencies also had a rough week, as the value of their assets also plummeted by billions. Bitcoin, commonly referred to as digital gold or an inflation hedge, fell below $26,000 this week, well below its all-time high of $69,000 set in November.

Since then, the entire crypto market, which includes thousands of digital currencies and tokens, has lost more than half of its value.

In the bloody market, the most painful one is retail investors. The Terra/Luna page of the well-known forum Reddit recently featured several suicide prevention psychology hotlines, including Australia’s LifeLine and groups from the US, UK, Spain, China, Sweden and 90 other countries.

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One Reddit user contributed: “I lost over $450,000 and can’t pay the bank. I’m going to lose my home soon. I’m going to be homeless. Suicide is my only way out”.

Dan Ashmore, crypto data analyst at nvezz.com, commented that the fallout from the Terra blockchain has brought a lot of pain and grief: “It was a dark day for cryptocurrencies, people lost their livelihoods, hundreds of platforms collapsed, Years of building are gone. College funds, lifetime savings, leveraged gambling – there’s a lot of pain out there. Regulators are watching, it’s definitely a step backwards. Obviously, it’s also a failure of decentralized, unsecured stablecoins, a The huge financial experiment is out of control and he has a huge chunk of the market, so stay safe.”

What do you think about regulation?

US Treasury Secretary Yellen addressed UST and Tether directly this week. At a congressional hearing, Yellen said such assets do not currently pose a systemic risk to financial stability — but hinted that it might eventually: “I would not characterize this scale as a risk to financial stability,” she said. A real threat to stability, but they are growing rapidly.” Yellon urged Congress to approve federal regulation of stablecoins by the end of the year.

The U.K. government has taken note, too, with a government spokesman telling CNBC on Friday that it stands ready to take further action on stablecoins in the wake of Terra’s collapse.

“The government has made it clear that certain stablecoins are not suitable for payment purposes because of the characteristics they share with unsecured cryptoassets,” the spokesperson said. The U.K. is planning to bring stablecoins under the purview of electronic payments regulation, which could expose issuers such as Tether and Circle to the country’s market watchdog.

Latest Developments: Do Kwon Proposes to Rebuild Terra Ecology

On Friday, Do Kwon released a plan to rebuild the Terra ecosystem on the Terra Forum, which is equivalent to restarting the entire Terra blockchain, with network ownership fully distributed to UST and LUNA holders through 1 billion new tokens.

Of the 1 billion coins, 400 million are allocated to LUNA holders immediately before UST de-anchored, 400 million to UST holders, 100 million to LUNA holders when the original Terra chain stopped, and 100 million reserved for future ecosystems Prepare for development. With the exception of the third tranche of 100 million, the other three tranches will all be staked when the network restarts. The annual inflation rate for new LUNAs in the future can be set at 7%. The proposal is currently under community discussion.

The fall of Terra, once one of the most valuable digital currencies, shows that cryptocurrencies have a long way to go before they become an alternative to traditional currencies.

But investors are worried that if the value of a digital asset that claims to be “stable” can be wiped out in a matter of days, who will be next?

Posted by:CoinYuppie,Reprinted with attribution to:https://coinyuppie.com/the-darkest-week-of-encryption-a-review-of-the-tens-of-billions-of-dollars-in-terra-ecological-collapse/
Coinyuppie is an open information publishing platform, all information provided is not related to the views and positions of coinyuppie, and does not constitute any investment and financial advice. Users are expected to carefully screen and prevent risks.

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